Eurocopter: Dropping NH90 Order Would Hurt France, Firm

Apr. 8, 2013 - 07:44PM
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PARIS — France faces a penalty of about 35 million euros ($45 million), loss of some 1,000 jobs, and a transfer of industrial workshare to Italy and the Netherlands if the government decides against ordering a second batch of 34 NH90 Army helicopters, a Eurocopter document said.

“It seems not firming up the order option for the 34 (Tactical Transport Helicopters) would have major industrial consequences in terms of employment and finances, but also competences, and at a time when the expected activities of Eurocopter in France face a significant drop and when financing needs will be at their maximum,” Eurocopter said in a Feb. 18 briefing note to the Defense Ministry.

Defense News has seen a copy of the note.

The unit price of the Army version of the NH90 is 28.6 million euros, a French Senate report said in November.

Eurocopter set out in its briefing note the industrial and financial consequences of not buying the 34 helicopters. A decision was due at the end of March under the French contract known as CA 16-2. A decision has not been made.

After the note was sent, a senior procurement official and a senior EADS executive reached an informal understanding in early March to postpone a decision, a source familiar with the subject said.

Eurocopter executives, however, are worried because postponement creates deep uncertainty, the source said. Eurocopter hopes to find out in the next few weeks the fate of the NH90 program, Executive Vice President Dominique Maudet said March 27.

Eurocopter is the helicopter division of EADS.

Defense Minister Jean-Yves Le Drian visited Eurocopter’s Marignane factory in the south of France on April 5. The EADS division is the largest employer and industrial operator in the region, while the French government is its biggest customer.

Discussions are being held on the NH90, a Defense Ministry spokes-man told journalists April 4.

France has frozen a number of large program launch decisions while waiting for publication of a defense and security white paper and decisions on the military budget. The white paper is due April 10.

The 2013 defense budget authorized 156.2 million euros for the NH90 program, essentially a down payment for the second batch of 34 helicopters. If Paris decides against taking up the NH90 option, the French contract set a penalty in 1999 prices of 21.38 million euros, which is 35 million euros under current conditions, the note said.

Among the consequences outlined in the note:

 Price impact: Belgium, France, Germany, Italy, the Netherlands and Portugal benefited from unit prices based on orders for 605 aircraft placed before 2020. So far, only 329 units have been ordered. Unit prices for future orders will be reviewed.

France got a 12 percent discount under a deal dubbed the “Bonn rebate,” based on a total order of 68 units. That discount is worth 106 million euros under current prices. A discount would not be available for a future order.

It takes 36 months to build an NH90. The cost of keeping NH90 production open in France is around 40 million euros annually. A break in production would boost costs to the buyer.

 Jobs impact: Some 1,000 French jobs tied to the 34 units would be lost. These would go from Eurocopter and suppliers, including small and medium-sized companies.

The jobs would be cut, as Italy and the Netherlands will likely call for more workshare. A reallocation is probable, as France had a share higher than the 30.85 percent agreed among the six countries represented in the NATO Helicopter Management Agency.

The likeliest outcome would be transfer of assembly of the NATO frigate helicopter version for the French Navy to Italy, “with consequences for the timetable, and maybe quality,” the note said.

Support for the French NH90s would go to the Netherlands, with consequences for speed of response and cost.

Production of the 34 NH90s already ordered for the French Army ends in 2016. That is expected to be a bad time, as Eurocopter anticipates lower activity in the 7-ton category because introduction of its EC175 civil helicopter will be insufficient to offset the EC225’s loss of market to competitors, the note said.

Without the order, Eurocopter would be unlikely to deliver to the French Army the level of support it provided in Afghanistan, Libya and Mali, the note said. The company sent, without advance notice, specialists and French language manuals for deployment of the NH90. The Navy would be hit if assembly of the NFH version left Marignane.

France’s credibility as a cooperation partner also will take a blow if the option is not taken up in the contracted time, the note said.

“Is it in effect credible to look actively for new cooperative armaments programs while not keeping commitments on an emblematic contract, one where prices and performance are meeting expectations?” the note asks.

Despite the note’s claim, the NH90 program has suffered delays and cost overruns, particularly the naval version. The 12 NH90s to be delivered to the Army this year are late.

The NH90 would suffer in export markets, the note said. After 529 orders from 14 countries, Eurocopter is struggling to secure additional NH90 sales due to U.S. competitors, which are supported by diplomatic channels and the Pentagon’s Foreign Military Sales program, the note said.

Leading prospects, including Qatar, would only buy the aircraft because of French government support, the note said. A decision against the second French Army batch would send a “very bad signal,” as it would call into question France’s interest in the helicopter program, the note said.

Eurocopter takes a loss on the NH90 program because of overruns on development and retrofits on intermediate versions delivered, the note said. A cut in losses had been expected with series production of the final version.

A break in production would deepen losses when Eurocopter must invest heavily to renew its civil range, with the X4 and X6 models needing nearly 2.6 billion euros of funding, the note said.

The uncertainty over the program comes as Guillaume Faur takes over May 1 as chief executive of Eurocopter, succeeding Lutz Bertling.

Since the note was sent, Germany announced March 15 a cut in its purchase of NH90s to 82 from 122, as part of a global restructuring of helicopter orders. That included cutting back orders of the Tiger attack aircraft to 57 from 80 units.